Letter from Richard J. O'Melia, Director, Bureau of Enforcement, Civil Aeronautics Board, to William E. Jackson of Milbank, Tweed, Hadley & McCloy, counsel for Cede & Co., March 28, 1973---- Response by Mr. Jackson to Mr. O'Melia, May 17, 1973.. Letter from Mr. Jackson, on behalf of Chase Manhattan Bank and one of its nominees, Kane & Co., to Mr. O'Melia, May 17, 1973- "Sale Hearing Raises Spy Questions-CIA and the Southern Airline," 340 1-A-Concentration of stockholdings data for a sample of 50 stocks held in high concentrations primarily by 50 bank trust departments Page Morgan Guaranty Trust directors of companies in which it has stockhold- ings reported to Senator Metcalf or in July, 1973 issue of Fortune, a memorandum by Julius W. Allen, Congressional Research Service, Page Library of Congress, September 10, 1973. Directorate linkages involving the Burlington Northern and various banks, a memorandum from Julius W. Allen, Congressional Research Service, Library of Congress, September 20, 1973. "Corporate Closeness-LILCO (Long Island Lighting Company) Is A 1973____ AN ALTERNATIVE TO CONCENTRATION Of Voting RigHTS Literature relating to modification of the "One Share, One Vote" rule in corporation voting, a memorandum by Julius W. Allen, Congressional Research Service, Library of Congress, to Senator Metcalf, May 25, "The Government of Business Corporations: Critical Reflections on the Rule of 'One Share, One Vote'", by Professor David L. Ratner, Cornell 387 INTRODUCTION BACKGROUND Congressional committees, Federal agencies and scholars are considering substantive issues created by the dominant role of institutional investors-bank trust departments, insurance companies, investment companies, pension funds and others, such as foundations and universities in major corporations. At least 32 institutions are known to manage investment portfolios in excess of $5 billion each. (They are listed in the table below.) Their decisions can alter the stability of the market and individual companies. To minimize impact on medium and small companies, large institutional investors tend to concentrate their investments in large companies. This has led to the two-tier market, in which stocks of the largest companies trade at a considerably higher multiple of earnings than those of many medium and smaller companies, which encounter difficulty in raising equity capital. INSTITUTIONAL INVESTORS' ROLE The role of institutional investors is of course not limited to the acquisition and sale of stock and the right, in many cases, to vote it. Some institutional investors make loans to companies in which they invest, or provide insurance coverage. Their representatives often sit on the companies' boards of directors. Sometimes institutional investors help facilitate or block mergers. The institutional investors' effect on medium-sized and smaller companies, and those companies' inability to pierce through nominee accounts to communicate with their own stockholders, was described to a Senate subcommittee this summer by the chairman of the Committee of Publicly Owned Companies, C. V. Wood, Jr., who is also president of McCulloch Oil Corporation. Speaking for the leadership of 469 companies with $43 billion in assets, 1.8 million stockholders and 1.1 million employees, he testified that the institutional investors have run up 32 INSTITUTIONAL INVESTORS WITH ASSETS UNDER the price of the stock of the big companies with which they have personnel and business relationships. Trading in stocks of smaller and medium-sized companies languishes; their stock prices sink to new lows despite good earnings. Because the market undervalues the stock, the smaller companies cannot raise money in the market for replacement or expansion of facilities. So they have to borrow the capital they need, increasing their debt-equity ratio to dangerous highs. They borrow at escalated interest rates from the banks which are driving them deeper into debt. They cannot break through the maze of nominee accounts held by institutional investors to communicate directly with their beneficial shareholders. As a consequence, Chairman Wood testified, the smaller and medium U.S. corporations have become prime targets of the foreign companies which have recently taken over U.S. companies from bases in Italy, France, Switzerland, Germany, the United Kingdom and Saudi Arabia.' The multiple levers of corporate management available to institutional investors present fundamental questions regarding public policy. These matters cut across the concerns of a number of different agencies and congressional committees. Together they present questions about the nature of our industrial society-how it will be directed and controlled. There is as yet no consensus regarding what additional Government controls, if any, should be placed on institutional investors. Indeed, there is respectable opinion that institutional controls produce beneficial effects, such as more rational and expert market analysis, and more effective oversight of corporate management. COMMITTEE RESPONSIBILITY However, it is clear that the Congress, the agencies and the public generally will not obtain answers to basic questions answers that will provide the framework for reasoned public policy-without a more solid data base than is now available. The Committee on Government Operations and our subcommittees have authority and responsibility regarding the collection and dissemination of such data. So do the Office of Management and Budget and General Accounting Office under statutes subject to Government Operations Committee and subcommittee review. This document describes corporate reporting requirements of Federal regulatory agencies regarding stock ownership, control, diversification, debts and officers. It describes deficiencies in these requirements and the procedures used to implement them as regards stock ownership and control. It presents information heretofore unavailable, because of these reporting deficiencies, regarding concentration of stock holdings. And it presents recommendations for further inquiry and action. COMMISSION AND OMB RESPONSIBILITIES Six Federal commissions require companies subject to their regulation to submit information regarding their ownership at least annually. Those commissions are the Civil Aeronautics Board, Federal Communications Commission, Federal Power Commission, Federal Maritime Commission, Interstate Commerce Commission and the Securities and Exchange Commission. Congress has delegated to these commissions broad authority to collect 1 Financial Markets, Hearings before Subcommittee on Financial Markets, Senate Finance Committee, on impact of institutional investors in the stock market, 93d Congress, First Session. July 24-26, 1973, Part I. whatever data they deem appropriate to carry out their statutory responsibilities.2 Agency requests for data have on occasion been denied, delayed or diluted by the Bureau of the Budget and its successor, the Office of Management and Budget. The budget agency based its actions on the Federal Reports Act of 1942 (Title 44, U.S. Code, Sections 3501-3511) which authorized it to coordinate collection of information by agencies from 10 or more persons or firms. INTENT OF FEDERAL REPORTS ACT The intent of that Act was to avoid unnecessary duplication of questions and to minimize the burden on business, especially small business, and to maximize the usefulness of information collected to other Federal agencies and the public. The hearings preceding enactment of the Federal Advisory Committee Act (P.L. 92-463) ascertained that budget agency officials reviewed regulatory commissions' requests for information in unpublicized meetings with advisory committees composed exclusively of representatives of the industries concerned. This practice has tended to discourage agencies from attempting to collect information that they, the Congress and the public need. This year the Congress, in approving S. 1081, the Alaska pipeline bill, removed OMB control over the questionnaires of independent regulatory commissions, and directed the GAO to review commission requests for information. OWNERSHIP REPORTING REQUIREMENTS Commission requests for company ownership data vary. (A recent General Accounting Office summary of reporting requirements with respect to stock ownership, control, diversification, debt and officers, and an excerpt of pertinent statutes prepared by our staff appear in Appendix A, page 197.) In capsule, the ownership reporting requirements, by agency, are as follows: The Federal Trade Commission collects no information on company ownership on a recurring basis. An FTC staff study is seeking to develop data on ownership and other characteristics of the Nation's largest manufacturing corporations. 5 or The Securities and Exchange Commission has different levels of reporting minimum-holders of more than 1, 10 percent of the stock, or the 20 largest stockholders-for different types of companies. However, the SEC usually asks for identification of the large "beneficial" owners. They are the persons or institutions who receive the dividends, but not necessarily the same persons or institutions empowered to vote the stock. IDENTITY OF VOTERS SOUGHT Four of the commissions forthrightly ask for identification of security holders with the "highest voting powers" or similar phraseology-at least in some instances. The Federal Maritime Commission asks water carriers for the top 30 security holders and their voting powers. (However, freight forwarders need report to the FMC only stockholders who individually own or hold 5 percent or more of the stock, and the beneficial owners of those holdings if other than the individual owner or listed holder.) The Federal Communications Commission requests reports on holders of 3 percent or more voting interest in broadcast companies, and generally makes supplemental 2 However, Congress has never acted on the Natural Gas Information Act which the Federal Power Commission has regularly requested since the 1950's. |